Economic Growth Damaged By Rising Temperature
August 7, 2012

Economic Growth Damaged By Rising Temperature

April Flowers for - Your Universe Online

A new study, “Temperature Shocks and Economic Growth: Evidence from the Last Half Century,” published this summer in the American Economic Journal: Macroeconomics shows that even temporary rises in local temperatures significantly damage long-term economic growth in developing countries.

The research team, lead by MIT professor of economics Ben Olken, looked at weather data over the last half-century, finding that every 1-degree-Celsius increase in a poor country, over the course of a given year, reduces its economic growth by about 1.3 percent. This only seems to apply to developing nations, wealthier countries do not seem to be affected by the variations in temperature.

“Higher temperatures lead to substantially lower economic growth in poor countries,” says Olken.

It's fairly easy to understand how prolonged droughts and hot weather might hurt agriculture, the study indicates that hot spells have a much wider economic effect.

“What we´re suggesting is that it´s much broader than [agriculture],” Olken adds. “It affects investment, political stability and industrial output.”

For every year between 1950 and 2003, the team collected temperature and economic-output data for every country in the world and analyzed the relationship between them. They were amazed no one had done this kind of study before, even though they weren't sure there was anything to find.

The researchers broke down the economic data by type of activity instead of looking at it as an aggregate output and concluded that there were a variety of "channels" through which weather shocks hurt economic production. These channels include slowing down workers, commerce, and perhaps even capital investment.

“If you think about people working in factories on a 105-degree day with no air conditioning, you can see how it makes a difference,” Olken says.

One startling consequence the data revealed was that higher temperatures in a given year affect not only the country's current economic activity, but had far reaching affects on its growth potential, growth undeniably lagged following hot years.

To understand this phenomenon, first think of a dry year for vegetables in your backyard garden, Olken suggests. Although the bad weather would hurt the plants this year, reasonable weather the following year would allow the backyard crop to return to its normal level. Now, contrast that with the problems that affect industrial and technological development and capital investment. Temperature shocks that limited those activities could compound over time.

“If you think about economic growth, you build on where you were last year,” Olken explains. For longer-term industrial or technological projects, he adds, “If it´s that kind of activity that´s lost, then it affects the country´s long-run growth rate, [and it´s] not a one-off hit.”

The researchers integrated data about forms of government into the study and found correlations there as well. Temperature shocks seem to be associated with political instability. A 1-degree-Celsius rise in a given year, they found, raises the probability of "irregular leader transitions," such as coups, by 3.1 percent in poor countries. They concluded that poor economic performance and political instability are likely mutually reinforcing.

The study does not try to account for all the possible problems that could be generated by long-term climate change, like rising oceans, floods or increased storms. However, it does suggest some general points about the economic impact of a warming atmosphere. It is vital, he says, to “think about the heterogeneity of the impact between the poor and rich countries” when leaders and policymakers map out the problems the world may confront in the future. “The impacts of these things are going to be worse for the countries that have the least ability to adapt to it,” he adds. “[We] want to think that through for the implications for future inequality. It´s a double whammy.”